Are Investors Turning Away From Big Oil?

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By Irina Slav

Earlier this year, when Big Oil reported its results for the final quarter of 2017, analysts projected that investors would be happy, making the industry an attractive investment opportunity once again. Indeed, investors in the most frugal of Big Oil companies were happy and the stock reflected this. However, other Big Oil stocks have suffered and are likely to continue to suffer as investors change their priorities.

Bloomberg’s Kevin Crowley and Kelly Gilblom report in a recent story on the topic that Big Oil investors are demanding more than just regular dividends. They are demanding higher dividends and they are worrying about a number of things that could eventually make them ditch their oil stocks, weighing further on shares already pressured.

What are investors so worried about? Climate change policies, for one thing, and their undoubtedly serious impact on the fossil fuel industry. The growth of EV and renewable energy generation capacity adoption is another cause for concern. Finally, as a result of these two factors, investors are worried that long-term oil demand is unsustainable despite all assurances from the industry.

This combination of factors, according to analysts cited by the Bloomberg authors, explains why Big Oil stocks have not followed the upward curve of oil benchmarks. Investors, this discrepancy between oil prices and oil stocks suggests, do not care about heightened tensions in the Middle East, possible new sanctions against Iran, or the war in Syria. They don’t care about U.S. inventories falling back into their five-year average range and about Venezuela’s plummeting production that has been instrumental for OPEC’s exceptional quota compliance in the production cut deal.

What investors care about, it seems, is the long term. This should come as no surprise, really, since long-term planning is what distinguishes investors from the millions of day traders chasing the next deal. This distinction is valid for every industry, but in oil it has become particularly pronounced as the industry undergoes a seismic shift into renewables, pressured—you guessed it—by investors.

This shift in fact begs the question of why aren’t investors happy with their Big Oil holdings if the companies are making inroads into renewable energy. If the threat of renewable energy displacing oil is one of the reasons why investors are selling their oil stocks, then the fact that the issuers of these stocks are entering—or expanding into—renewables should offset this particular worry. Getting on the renewables bandwagon means thinking ahead to ensure the sustainability of the business, after all. Yet data from global equity indices suggests investors just don’t like Big Oil as much as they used to.

There are two reasons for this. One is that the shift to renewables is at a very early stage and investors need more evidence that Big is serious about renewables. The other reason has to do with reputation. Pension funds and investment banks are ditching their holdings in oil, gas, and coal because they don’t want to look like smokers at the non-smoking table of the new socially responsible world. Also, smoking is bad for you and those around you. It is this latter reason that will likely take the upper hand in the near to medium term, possibly changing the makeup of Big Oil significantly and further pressuring its value until the first results from the green shift become evident.

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